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Changes to the regulations governing SMSFs mean year-end reviews take on new importance. The situation presents opportunities for advisers to add more value for their clients, especially when it comes to insurance, Julie Steed writes.

Last year, a number of changes were made to superannuation rules, placing additional requirements on trustees. Despite the changes having been in place for over six months, many trustees remain unaware of them and have not taken the necessary steps to ensure they comply. The changes require trustees to clearly separate SMSF assets from assets of other entities, use market valuations, regularly review investment strategies and consider the insurance needs of members.

Year-end reviews provide an opportune time for trustees to review their investment strategy and consider the management of assets and insurance in the process.

Separation of assets

These changes introduce an operating standard that requires the trustee of an SMSF to keep the assets of the fund separate from any assets that are held by trustees or standard employer sponsors and their associates.

The requirement to separate assets has always been (and continues to be) a covenant in the Superannuation Industry (Supervision) (SIS) Act. The covenant is taken to be incorporated in the trust deed of a fund, however, breaches of the covenant only result in penalties if the SMSF members take action against the trustees for breach of trust. Given the mutuality between the SMSF members and the trustees, this is unlikely.

Despite the long-standing existing requirement to keep assets separate, breaches consistently represent over 25 per cent of the value of all audit contravention reports, according to the Australian Taxation Office’s (ATO) publication, “SMSFs – A Statistical Review 2010-11”. The introduction of the requirement as an operating standard in the SIS Regulations means it is now easy for the ATO to apply penalties for intentional or reckless contraventions of this breach.

Asse valuations

These changes also require that all assets must be valued at market value for the 2012/13 year of income, and all subsequent years. Market value must be used when preparing the fund’s accounts and member statements.

Previously, assets were only required to be valued at market value if the fund had in-house assets and when a pension was started. If clients have assets that require valuations, they should prepare for this in plenty of time to complete 2012/13 year-end work.

Regular review of investment strategy

Trustees are now required to regularly review a fund’s investment strategy. While the SIS Regulations have always required trustees to formulate and give effect to an investment strategy, they are now required to ensure the investment strategy is reviewed regularly as well. The change is designed to ensure trustees do not simply set and forget their investment goals. Instead, the investment strategy of the fund needs to be reviewed regularly to ensure it remains relevant and appropriate as and when circumstances change. There are a number of events that should prompt an SMSF trustee to consider a review of the fund’s investment strategies, such as:

the admittance of a new member,

changes in a member’s personal circumstance (marriage, children),

commencing a pension, or

significant changes in market conditions.

The requirement for a regular review applies to all superannuation funds, not just SMSFs.

Under the regulations, the investment strategy is required to consider:

risk and return,

diversification,

liquidity,

ability to meet liabilities, and

insurance for members (new for SMSFs only).

As an adviser, you can help trustees by building a review of the SMSF investment strategy into their annual review and ensuring the investment strategy review is documented. It is also important to make sure the investment strategy is appropriate for all members of the fund. For example, if two SMSF members have significantly different risk profiles, it would be necessary to ensure this is reflected in the fund’s investment strategy. This may require the establishment and maintenance of different investment strategies for each member. Trustees should ensure a review of their SMSF investment strategy occurs by 1 July 2013.

Formulating insurance as part of the investment strategy

When formulating the fund’s investment strategy, SMSF trustees are required to consider whether they should hold insurance policies for the members. While there is no requirement for the fund to obtain insurance cover, the need (or otherwise) must be actively considered.

“SMSFs – A Statistical Review 2010-11” stated that, as at 30 June 2011, SMSF assets were valued at $373.8 billion, while the value of insurance policies held in SMSFs was $186 million, less than 0.05 per cent of fund assets. There may be many good reasons why trustees don’t hold insurance in super, however, when coupled with the widely accepted problem of underinsurance in Australia, the government is keen to ensure consideration is given to the need for insurance in super.

Insurance can include life, total and permanent disablement (TPD), income protection and trauma insurance.

By ensuring that trustees are aware of the obligations, advisers can help them assess their insurance needs, including the benefits of holding various types of insurance within the SMSF compared to outside the super environment.

Updating the investment strategy

Once the insurance needs of members have been determined, it is necessary to ensure the investment strategy is updated to reflect the trustee’s consideration of insurance. Given the very personal nature of the assessment of insurance needs, this may be documented by way of a minute, relative to each member. The documentation in the investment strategy could be quite concise, for example, “the trustees have considered the insurance needs of members of the fund and have determined that the insurances held by the members within the fund remain appropriate (or that it remains appropriate not to hold insurance cover)”. However, the trustee’s consideration may be supported by a more comprehensive document, such as a statement of advice.

Insurance and conditions of release

In conducting the review, it is important to remember the government has previously announced its intention to ban superannuation funds from holding insurance policies that do not meet a superannuation condition of release. Superannuation Legislation Amendment Regulation 2013 (No 1), which will give effect to the changes, was tabled in the Senate on 12 March 2013.

The regulation introduces new requirements from 1 July 2014 whereby all insured benefits must meet a condition of release for death, terminal illness, TPD and temporary incapacity. Accordingly, super funds will not be able to offer insurance benefits under an own occupation TPD policy or trauma policy within super. The definitions for insured benefits need to be consistent with the definitions in the SIS Regulations, but they do not need to be identical. The rules apply to all super funds, not just SMSFs.

The regulation contains quite generous grandfathering provisions; the ban will not apply to the continued provision of benefits to members who joined pre-1 July 2014. This provides an opportunity for own occupation TPD and/or trauma insurances to continue to be held within super for members who held such policies before 1 July 2014. Existing cover can be increased or decreased and premiums adjusted accordingly. However, the exemption cannot be used to provide a member with a type of cover they did not hold before 1 July 2014.

Trauma

When considering the use of trauma policies in super, it is important to consider the ATO’s previous guidelines for holding trauma in super, as contained in SMSFD 2010/1. The main requirements are that the trauma policy is held in the name of the trustee of the fund, no benefits are paid until a condition of release has been met and that the policy is not acquired to secure some other benefit for another person (that is, the sole purpose test is met). The ruling does provide that an unreasonable diversion of contributions to premiums for the trauma cover would be difficult to reconcile with the sole purpose test and the fundamental retirement objective of superannuation. The ruling was made in 2010, when concessional contributions of up to $50,000 could have been made. The current lower cap of $25,000 for all may make this test more difficult for older members with higher premiums.

Self-insurance

The regulation also introduces a ban on self-insurance from 1 July 2013. Again, the provision applies to all superannuation funds, not just SMSFs. Grandfathering also applies; if funds already have self-insurance it can be maintained until 30 June 2016, however, there is no grandfathering beyond 1 July 2016.

While large-scale self-insurance is not common in SMSFs, popular self-insurance strategies include insuring income protection during a policy waiting period and self-insuring 25 per cent of pre-disability salary above the 75 per cent provided by an insurance policy. Any such self-insurance will need to cease by 30 June 2016. In addition, trustees who have maintained reserves for self-insurance purposes may need to consider strategies for distribution of the reserves.

Transfer of member-owned insurance policies

It is important to remember that if a member has an insurance policy in their own name, it cannot generally be transferred into the name of the SMSF without breaching the related-party acquisition rules. It may be possible to approach the insurer to see if they will cancel a policy held in the name of the member and reissue the policy in the name of the trustee of the SMSF. Many insurers are happy to facilitate such arrangements. Policy terms and conditions need to be reviewed carefully to ensure there is no loss of benefits, particularly if the policy has been in force for a long time and has generous terms or definitions that are no longer offered by the insurer.

Other insurances

A review of personal insurances may provide a timely prompt to ensure that other insurances are in order, such as public liability insurance and insurance for property, collectables and other insurable assets.

Collectables

Collectables acquired since 1 July 2011 are required to be insured in the name of the SMSF trustee within 28 days of acquisition. For funds that held collectables as at 30 June 2011, insurance will be required from 1 July 2016. When trustees are reviewing their insurance arrangements, it is worthwhile considering the future insurability of any collectables. If the trustees are unable to obtain insurance for a collectable, it will need to be disposed of before 1 July 2016.

Public liability

Where an SMSF holds an investment property, public liability insurance is an important consideration. A recent case of a landlord being sued following the death of a tradesman working on a property highlights the need for this type of protection. Public liability insurance is often considered when the property is a commercial premises, since many business insurance packages include this type of cover. However, public liability insurance is often overlooked if the property is a residential property. Trustees who hold a property should review the type and amount of cover held.

These changes provide an opportunity for advisers to work with clients to regularly review their investment strategy, to consider the insurance needs of members and to document the reviews.

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